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of the past generation. Ambiguity must be banished from economic terminology. Wealth and capital are not the same or even related as genus and species. Capital is essentially an individual acquisitive, financial, investment ownership concept. It is not coextensive with wealth as physical objects, but rather with legal rights as claims to uses and incomes. It is or should be a concept relating unequivocably to private property and to the existing price system. Social capital is but a mischievous name for national wealth. The so-called, misnamed, “interest problem” is not to be conceived of as correlated with a narrow class of artificial goods but rather as the time-value element permeating all cases of valuation of groups of uses differing in time. The admission of these and a number of logically related truths is partially, haltingly, inconsistently implied in much of the current treatment of the fundamentals. When will it be made frankly and clearly? When will the dead hand of Ricardianism be lifted from our economic texts?

John Bates Clark in his young manhood struck straight and telling blows for a newer, truer and more realistic conception of distributive theory. He did not attain an ultimate goal, but he advanced in the right direction, showing the way to us. The sincerest tribute that we, and that men of younger generations, can render to him is to seek and to find the truths implicit in the work of the notable era of which he was so large a part.

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Capital

Capital is a word derived from the adjective form capitalis (Latin root caput, head), meaning principal, chief. Its various meanings as a substantive are explained as the “several elliptical uses of the adjective” (Oxford Dictionary). As first used in commerce capital meant an interest bearing sum of money. The manifold derivative meanings are all of two types, the one implying ownership of a valuable source of income, the other the stock of physical goods constituting the income source. The one idea was from the first characteristically individual, acquisitive and commercial, that of any financial fund having a monetary expression; the other idea was characteristically impersonal and technological, that of the physical goods used to extract, transport, create or alter goods: ships, stores of merchandise, money, tools, machines, houses and, usually but not always, lands.

By a simple association of ideas the original thought of capital as a “fund” for investment was generally connected with lending by the class of passive capitalists, but capital as a “stock” of instruments was connected with borrowing by active enterprisers for the purpose of buying the physical instruments of trade and manufacture. This contrast disappeared, however, when the active enterpriser was pictured as neither borrower nor lender but one who “invests” (clothes) his purchasing fund in the physical equipment in his own possession. Thus the business as a whole might be thought of either as the sum or fund of purchasing power invested, or as the mass of goods which, although not bought with borrowed funds, embodied the owner's business fund.

These two types of capital concepts are so distinctive in essential

thought and practical application that confusion inevitably resulted from the use of one word to designate both. This confusion occurred not later than the early years of the seventeenth century, when capital was defined by Cotgrave in 1611 as “wealth, worth; a stocke, a man's principall, or chiefe, substance.” Here the idea of “worth,” implying a valuation, is thoroughly mixed with that of substance, no doubt in the sense of material things in possession. “Capital” thus used is a superfluous and confusing synonym of wealth, goods and stock.

This transition and duplication of terms was confirmed by association of the words capital and stock. The latter, an old Germanic root word, developed in English manifold meanings. The term stock was used in business in the sixteenth century as “a collective term for the implements and the animals employed in the working of a farm, an industrial establishment, etc.”; and at the same time as “a capital sum to trade with or to invest.” Even earlier, in the fifteenth century, stock meant “a sum of money set aside to provide for certain expenses; a fund,” but this became obsolete.

As English trading companies developed after the fifteenth century, the terms joint stock, capital stock, stock and capital were used with little clear distinction. Adam Smith (Wealth of Nations, bk. v, ch. i, pt. iii, art. i) says of the East India Company, chartered in 1600 by Queen Elizabeth: “In the first twelve voyages which they fitted

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out for India, they appear to have traded as a regulated company, with separate stocks, though only in the general ships of the company. In 1612, they united into a jointstock.” This and other similar examples indicate that at first the “stocks” meant the physical merchandise composing the cargo, and a joint stock company was one in which these stocks were held jointly instead of severally. But Smith refers at once to the “capital” of the joint stock company as so many thousand pounds sterling. His treatment of capital as a whole manifests all the errors that have accompanied the use of this elusive term ever since: the employment of the term as meaning both investment fund and goods bought with it or sometimes “talents” or “skill” acquired by means of it, and as denoting both value and a stock of physical agents, etc. Incidentally Smith suggests a thought that was destined to grow until a certain kind of “circulating” capital, subsistence for laborers, came to be looked upon by J. S. Mill and others as the very essence of the capital concept.

In the three quarters of a century after 1776 the changes in machine production and transportation and in financial and commercial organization were epoch making. Not only did factories owned by individuals and by partnerships increase greatly in size and resources, but great corporations building and operating factories, canals, railroads, steamships, commercial enterprises and banks were chartered and their shares widely distributed to subscribers. At the same time the functions of banks and the agencies for investment of capital funds grew apace. These changes put into the foreground of attention the thought of capital as investment, both active and passive. Whether as cause or as effect this change was accompanied by the ever increasing attention given to commercial profits as contrasted with national welfare (or rather profit was assumed, in the doctrine of laissez faire, to be identical with welfare). It was during this period too that the word stock was increasingly displaced by “capital.” In Ricardo's work (Principles of Political Economy, 1817) this transition is perhaps half completed. His “profits” is still from the first word “the profits of stock,” and the phrase recurs occasionally, but his training and interests account for his few references to “stock” as physical agents used in technical processes, and for his many references to employers’ investment expressed with the pounds sterling symbol. The emphasis is different from that of Smith, but the confusion of two meanings remains.

J. S. Mill, however (Principles of Political Economy, 1848), scarcely uses the word stock after the definition of capital as “this accumulated stock of the produce of labor.” But the “function of capital is production,” the goods mentioned are all physical and usually their function is described as technological. He is soon, however, hopelessly confused in attempts to distinguish between capital to the individual and capital to the nation. The “capital” employed in production is “worth ten thousand pounds.” The chapter on “increase of capital” is mostly concerned with “the produce of past labor”—physical objects; but that on “the profits of capital or stock” treats mainly a “rate” of profits on a valued investment. Mill stumbles at length into the notion that all advances “have consisted of nothing but wages,” a large portion as direct payment and the rest as “previous advances” which “consist wholly of wages.” Nothing could be more explicit—or more erroneous as an explanation of the origin of capital values—ignoring as it does every influence from scarcity of natural materials, from monopoly, from previous profits, from manifold speculative influences and from recapitalization (the revaluation of agents). Mill's capital concept at this point is the

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fruit of his labor theory of value—herein, however, he has substituted wages for Ricardo's quantity of labor, thereby better concealing the difficulty due to various qualities and values of labor.

The capital concept remained in the circle of English “liberal” price economists as Mill had left it until the late eighties. Among them Marx's conception of capital as an agency of exploitation found no echoes. Yet unquestionably there was here an aspect of truth, one which at that time and since then has been given wide recognition in Germany. Capital both with Marx and with Mill involved the confusion of acquisition and “production,” Marx seeing chiefly the acquisitive and Mill the technical aspect. Classification of capital as one of the three factors of production implies its physical nature and its technological function. Its yield (profit, or interest, as by preference it began to be called) was assumed to be coordinate in nature with rent (of land) and wage (of laborer); yet profits (or interest) as a rate percent of an investment manifestly does not fit into this scheme, and there is a consequent confusion in the theory of incomes.

The psychological school after 1870 made earnest attempts to revise the prevailing capital concept. Jevons, in his incomplete studies of capital (e.g. The Theory of Political Economy, 1871, ch. vii; also appendices i-ii in 4th ed. London 1911), offered some original suggestions, but in the end adopted Mill's subsistence (food for laborers) concept. Böhm-Bawerk (Kapital undKapitatzins, 2 vols., 1884–89) as a disciple of Menger sought to make the theory of capital his peculiar domain, but after beginnings which pointed toward a value investment concept and after painstaking studies of earlier views he adopted the conventional confused concept of “capital in general” as “a group of [physical] products which serve as means to the acquisition of goods.” This foredoomed him to a productivity theory of interest—the very thing he had attempted to avoid. He also developed a sort of subsistence theory of capital investment in connection with his periods of production in “the roundabout process.” J. B. Clark, while engaged in controversy over the single tax, detected the duality of the “orthodox” Mill-Ricardian capital concept and proposed (Capital and Its Earnings, 1888; also The Distribution of Wealth, 1899) to match it with twin terms, “capital-goods” or physical agents including land, and “pure capital” as the (supposedly) permanent fund of value resident in them. Yet in accounting for “the genesis of capital” (physical) and for the capital value Clark too lapsed inconsistently into the old labor theory of value.

Clark's eclectic terminology of “capital goods” and “pure capital,” although an unfortunate compromise, has had wide vogue. His reformulation served to stimulate much further discussion, some futile and some fruitful. Partly no doubt this discussion, partly the rapid changes in business organization, notably incorporation, banking, financial investment and more refined accounting, have caused the trend in recent economic texts toward the more general usage of capital in the valuation, property, investment sense of the terms.

The history of the capital concept helps to explain the early and still persistent confusion of money (a part) with capital (as the whole, of a person's fund of purchasing power) and this, in mercantilist doctrine, with wealth in general. The

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discussion of the ethical justification of interest (first in the original sense of a premium for a money loan, then in the widened sense of any income from private property) easily became confused because of the ambiguity of “capital.” The conservative justified acquisition through capital ownership by pointing to the value of the technological uses of physical wealth; the communist denied to wealth any valuable technological uses, attributing all value to labor and depicting private property as merely a tool of exploitation used by employers to rob the workers of the “surplus value” they had created.

Economic as well as ethical interest theory has suffered from this ambiguity. All use and productivity theories are attempts to explain the rate of premium (or yield) from a financial fund (capital value) by reference to the rent or usance value of a stock of indirect technical agents, without a theory of capitalization to explain first the value of the capital sum or principal.

The terms fixed and circulating capital are distorted expressions of the truth that various kinds and various portions of investments are more or less readily saleable, confused with the technological truth that various physical agents are more or less durable in nature.

The definition of capital determines in turn the meaning more or less vaguely attached to such phrases as capitalistic system, the growth of capitalism and the capitalistic age. Some see in capitalism essentially the use of labor saving machines (perhaps also power driven); this is a technological conception of capitalism. Others, more eclectic, see in capitalism essentially the wage system where the employer owns all the physical agents. But consistently with the value concept capitalism is merely the price system, the commercial exchanging organization of industry, where valuations, incomes and property take on the financial expression.

It is necessary to distinguish certain popular uses of the term capital, notably “nominal capital” of a corporation as the total face value of shares of stock outstanding, taken at par (or sometimes the total authorized); this, however, can mean only number of shares in the now frequent cases of shares with no par value. Sometimes nominal capital is used to mean the total denomination value of all securities, even bonds, and “capital of a corporation” as denoting these taken at their market value. None of these is properly called “capital” but rather “nominal value [or market value respectively] of corporation shares or securities.” Capital as applied to corporations is rather a figure of speech than a consistent scientific term, inasmuch as a corporation (a person only by legal fiction) has revenues and receipts rather than “incomes,” and assets (physical or intangible sources of revenues) rather than capital.

While recognizing divergent usage, we may define capital as the market value expression of individual claims to incomes, whether they have their sources in the technical uses of wealth or elsewhere. This is essentially an individual acquisitive, financial, investment, ownership concept. It is a “fund” only in the financial sense, not a stock of wealth. It is the sum, in terms of dollars, of the present worths of various legal claims. It therefore includes the worth of all available and marketable intangibles, such as credits, promises, good will, franchises, patents, etc. as well as the

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worth of claims to the uses of physical forms of wealth. Their summation as a financial fund is the resultant of a capitalization process. Physical objects of value are not capital, being sufficiently designated as goods, wealth or agents.

Capital as here defined is a conception of individual riches having real meaning only within the price system and in the market place where it originated, and developing with the spread of the financial calculus in business practise.

Consult: Cannan, Edwin, “Early History of the Term Capital” in Quarterly Journal of Economics, vol. xxxv (1920–21) 469–81, and comments on it by R. D. Richards and H. R. Hatfield in Quarterly Journal of Economics, vol. x1 (1925–26) 329–38 and 547–48; Cannan, Edwin, A History of the Theories of Production and Distribution

(3rd ed. London 1924); Böhm-Bawerk, Eugen von, Kapital und Kapitalzins, 2 vols. (4th ed. Jena 1921), tr. by W. Smart as Capital and Interest (London 1890), and The Positive Theory of Capital (London 1891); Davenport, H. J., Value and Distribution

(Chicago 1908); Spiethoff, A., “Die Lehre vom Kapital” in Die Entwicklung der deutschen Volkswirtschaftslehre im neunzehnten Jahrhundert, 2 vols. (Leipsic 1908) vol. i, no. iv; Passow, Richard, Kapitalismus (2nd ed. Jena 1927); Oppenheimer, Franz, Theorie der reinen und politischen Oekonomie, 2 pts. (5th ed. Jena 1923–24) pt. ii, p. 565–606; Fisher, Irving, The Nature of Capital and Income (New York 1906); Fetter, F. A., “Recent Discussion of the Capital Concept” in Quarterly Journal of Economics, vol. xv (1900–01) 1–45, and Economic Principles (New York 1915) pt. iv, and “Clark's Reformulation of the Capital Concept” in Economic Essays Contributed in Honor of John Bates Clark (New York 1927) p. 136–56; Veblen, T. B., “On the Nature of Capital” reprinted in The Place of Science in Modern Civilization (New York 1919) p. 324–86.

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